From an Asian FX perspective, these moves can quickly snowball. Higher U.S. yields boost the dollar, which pushes Asian currencies lower, raising speculation that countries with particularly weak exchange rates might intervene by selling FX reserves, thereby pushing up U.S. yields. Repeat to fade.
Japan is in or around this kind of territory. The dollar is a whisker from 150.00 yen – the yen is at its weakest in over 50 years on a real effective exchange rate basis – and Tokyo could intervene at any moment, potentially selling some of its huge stash of U.S. Treasuries.
But the Bank of Japan is also fighting on the domestic bond market front, announcing on Monday that it will conduct extra bond buying operations as the 10-year yield reached its highest in a decade at 0.78%.
A closely-watched BOJ survey on Monday showed that Japan’s business sentiment improved in the third quarter, with big non-manufacturers’ mood brightening to levels not seen since 1991. This would strengthen the view that the BOJ is closer to ditching 30 years of ultra-loose monetary policy, hence the rise in domestic yields.
But the yen continues to slide, suggesting it is still being driven by U.S. yields and the dollar side of the equation. Something has to give.
